What goes up must come down—at least for physical objects that are subject to gravity. But when talking about the prices of goods and services, then what’s more probable is that what goes up might come down.
There are four factors that influence basic pricing: positioning of your product in the market, demand for the product, costs incurred in making the product, and external factors like competition and government regulation.
The pricing of your product or service must be consistent with its positioning. For instance, if you intend to sell your products at a premium location, then you would price it higher than if you would sell the same at a regular department store. Or, if your product itself were a premium item, it would be sensible to give it a premium price. Paul Spiegelman, CEO of The Beryl Companies, puts it this way in an article for www.entrepreneur.com: “Become a premium provider. Identify the features that would be considered high-end on the value scale, and then highlight those crucial elements in your marketing. Resist the urge to offer a basic service level or baseline product.”
In the article “Pricing Strategy,” business coach Scott Allen stresses the importance of settling on a price that would result in a gross margin that would cover your fixed overhead (rent, utilities, telephone, loan payments and other expenses that stay the same whether sales go up or down) and variable costs (costs that change in proportion to sales), at the same time turn in a good profit. “Many entrepreneurs underestimate this and it gets an industry with a product or service regulated by government?
3. External Factors.
Remember that unless your product or service is so unique that you would be the only player in the field, you would have to bend to certain pressures or limitations imposed by legal restrictions or your competition. Will you join this possibility?
Then you might have to observe certain price floors or ceilings. If you intend to set your prices below the industry average, “what possible actions might your competitors take? Will too low a price from you trigger a price
These factors typically come into play depending on your priorities as an entrepreneur and the level of profitability that you would like to achieve over a certain period of time. You would be assured of a fair profit, however, if buyers perceive your prices to be fair—and ultimately become your consumers.
Half of the basic economic concept of supply and demand, it is generally true that, if all other factors remain equal, the higher the price of a product, the less people will demand that product. It is good therefore to look into how much your potential market would be willing to pay for your product or service. In excess or below this price point, demand for your product could go in either direction—that is, shoot up or disappear altogether.
Scott Allen, “Pricing Strategy: How much should you charge for your product or service?” ()
Paul Spiegelman, “How to Formulate A Premium Pricing Strategy”
This article was published in the April 2011 issue of Entrepreneur Philippines